September Rate Cuts

Economic Outlook: Asset Values Soar Amid Mixed Economic Signals

As we navigate through 2024, the U.S. economy presents a fascinating paradox.

On one hand, we're seeing record-breaking asset valuations across major sectors, while on the other, there are whispers of economic headwinds in certain areas.

Let's set the stage with some striking figures:

- The real estate market for ordinary homeowners has reached a staggering $45 trillion.

- Meanwhile, the U.S. stock market is valued between $50-$60 trillion.

- When including other non-commercial players, the total value of all assets, net of liabilities, has now soared to $161 trillion.

These figures aren't just impressive; they represent all-time highs for both asset classes.

As we’ll discuss in later posts, our data insights reveal a strong correlation between real estate and stock market performance, and currently, both are signaling continued bullish sentiment.

This bullishness persists despite some signs of weakening in certain economic sectors, particularly those impacting employment.

It's this juxtaposition of soaring asset values and mixed economic indicators that makes the current economic landscape so intriguing and complex.

As we delve deeper into the various facets of the economy, keep these record-high valuations in mind. They provide crucial context for understanding the resilience of the bull market and the broader economic trends we're observing.

Bull Market Continues

The Dow, S&P 500 and Nasdaq have been in what can be described as a "slow-motion melt-up" for the past six months.

This is despite some disappointing economic indicators showing the market remains resilient. This resilience is partly due to the belief that the Federal Reserve will act quickly to lower interest rates if there's a risk of recession.

Soft Patch Ahead

As we move into the second half of 2024, the U.S. economy and real estate face headwinds and opportunities:

Inflation and Fed Policy

Inflation continues to moderate, with core inflation (excluding shelter) already down to 2%.

The Federal Reserve has signaled satisfaction with the rapid decline in inflation but wants to see shelter inflation continue to come down.

The market now anticipates one to two rate cuts over the next 6 months, with a high probability of a cut in September.

This could improve affordability for consumers as car loans, credit cards and other borrowing could see lower rates.

Labor Market Normalizing

Contrary to recession fears, the labor market appears to be normalizing rather than weakening:

- Job openings have declined from 12 million to 8 million, but this is still at pre-pandemic levels.

- Initial unemployment claims have risen but are following a similar pattern to last year, which did not lead to a recession.

- Payroll employment growth has slowed but remains positive.

Economic Indicators

- The Citigroup Economic Surprise Index has taken a dive, indicating a potential "soft patch" in the economy.

- GDP growth for Q2 is estimated at around 1.5%, suggesting slow but positive growth.

- The services sector showed its first contraction in 49 months, but this is viewed as part of the soft patch rather than the beginning of a recession.

The Fed: Looking Ahead

Several factors could influence the economic outlook in the coming months:

1. Potential Fed rate cuts and their impact on market sentiment

2. The resolution of the current economic "soft patch"

3. Ongoing labor market dynamics

4. Inflation trends, particularly in shelter costs

5. Political factors, including potential policy changes related to trade and fiscal spending

Rate Cuts: September

The financial markets have now begun to forecast a 90% probability of the Fed cutting rates by September.

While there is a chance it could happen in July, the betting seems to be that September is more likely than this month.

More, here:

While optimism prevails, it's crucial to remain vigilant.

The unusual nature of the current economic cycle, with high interest rates not causing a bear market, suggests that historical patterns may not be as reliable for predicting future trends.